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Treat savings as bill, not residual payout

Hasn’t this been the practice since time immemorial? There seems to be no scope to challenge this old formula to compute one’s quantum of savings on month-on-month basis.

Right! And you are convinced to adopt it in one stroke. I, for sure am not fully convinced because we appear to be thinking inside the box. There is therefore a need to think outside the box and the moment one decides to do that way, the whole scenario will change.

But, before starting to think outside the box, let me spare some time to explain what it means thinking outside the box. Thinking outside the box and thinking beyond the box, also called thinking out of the box or thinking outside the square is to think differently, unconventionally or from a new perspective.

This phrase often refers to novel or creative thinking. It’s related to the process of lateral thought. The catchphrase, or cliché, has become widely used in business environments, especially by management consultants and executive coaches and has spawned a number of advertising slogans.

To think outside the box is to look further and to try not thinking of the obvious things, but to try thinking beyond them. What is encompassed by the words inside the box is analogous with the current and often unnoticed, assumptions about a situation. Creative thinking acknowledges and rejects the accepted paradigm to come up with new ideas.

Hope, I have prepared you enough to ‘think outside the box’ when it comes to put our usual formula into practice while computing savings. Probably, now you have the courage to challenge this traditional formula. So let us put our thoughts together to identify what basically is wrong with the formula. Although, there is nothing wrong mathematically, but under this formula the main determinant for ‘savings’ is the big brother – ‘EXPENSES’.

If expenses for a month are lower, the corresponding net savings will be higher and conversely if expenses for a month turn out to be higher, the corresponding savings will get reduced in direct proportion to any increase in expenses. And this is where we need to ‘think outside the box’ and try to re-design this formula. It is simple and straightforward.

Suppose, if we decide to interchange the places of the phrases ‘expenses’ and ‘savings’ in the old formula, how will it look like. Let us attempt it ourselves. First write down the old formula—Income minus Expenses equals Savings. Interchanging the place for expenses and savings gives the new formula becomes Income minus Savings equals Expenses. Haven’t we got an altogether new formula? But how is it different from the older one?

In the old formula, saving was dependent on the expenses, whereas in the newly designed formula saving is independent of the expenses. The new formula demands that the first bill you must pay is towards savings. The moment you do this way, your savings will no longer depend on your expenses. This concept is called – pay yourself first. It is not difficult to practice as we conceive it to be.

Remember; when you sit down to pay your bills for different utilities like water, electricity, gas and petrol, the first cheque you write should be to yourself. Decide an amount you can commit every month towards savings and immediately pay that bill by investing this money into a term deposit account with a bank or invest into a mutual fund scheme or opt for a retirement solution based on a systematic Investment plan.

You must do this even if you cannot afford it! Once you have paid yourself first, then only you must proceed to pay your other bills. So from now onwards please make it a practice to debit the first bill representing savings from your income and the balance you can spend the way you want it to be. Any deviation from the newly designed formula will make your goal of achieving financial independence a bit elusive.

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Author: Jagjit Singh

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